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Maximizing profits though production level planning may seem like a daunting task, but by comparing the total cost and the total revenue per item at various production levels, a company can zero in on the perfect level of output. Determining how much of a product to make, and in some cases restricting production, helps keep an endeavor profitable. In cases where the company's profit maximizing production level is far lower than its maximum capacity, it may indicate a good time to downsize or diversify into a new kind of product.
Calculate the cost to produce the product at several realistically attainable levels. You can use archived production cost to extrapolate the differing cost between production levels. To arrive at the cost per production level group, include factors like paying staff and keeping a steady inflow of production material. In general, higher levels of production become more costly because of production logistics and the limits of production infrastructure.
Estimate the total revenue per unit at various production levels. Assume that the current number of confirmed product orders represent ideal demand for the time being. Remember that the market demand, rather than a theoretical number, sets the upper limit of production before market saturation. If production exceeds market demand, the value per unit will drop.
Draw a graph on the graph paper using a pencil and the mathematical drafting set. Label the horizontal axis production quantity and the vertical axis total revenue.
Draw a line on the graph detailing the total cost arc, based on production cost estimates. Draw a line on the graph using total revenue based on projection data and past sales revenue statistics.
Mark the point where the total cost and the total revenue line intersect to reveal the ideal production level for the product.
Calculate the cost to produce the product at several realistically attainable levels. You can use archived production cost to extrapolate the differing cost between production levels. To arrive at the cost per production level group, include factors like paying staff and keeping a steady inflow of production material. In general, higher levels of production become more costly because of production logistics and the limits of production infrastructure.
Estimate the total revenue per unit at various production levels. Assume that the current number of confirmed product orders represent ideal demand for the time being. Remember that the market demand, rather than a theoretical number, sets the upper limit of production before market saturation. If production exceeds market demand, the value per unit will drop.
Draw a graph on the graph paper using a pencil and the mathematical drafting set. Label the horizontal axis production quantity and the vertical axis total revenue.
Draw a line on the graph detailing the total cost arc, based on production cost estimates. Draw a line on the graph using total revenue based on projection data and past sales revenue statistics.
Mark the point where the total cost and the total revenue line intersect to reveal the ideal production level for the product.
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